Cos likely to raise $6 bn through 'Masala' bonds in FY16

This will be one-fifth of annual ECBs that domestic cos raise annually, which is hovering around $30-33 bn in past three years

Leading corporate houses are likely to issue rupee-denominated offshore bonds aka 'Masala Bonds' worth $6 billion this year and double it to $12 billion next fiscal, says a report.

If raised, this will be one-fifth of the annual external commercial borrowings that domestic companies raise annually, which is hovering around $30-33 billion in the past three years, said an SBI Research report.

According to the report, domestic corporates are likely to raise $30 billion in ECBs (external commercial borrowing) this fiscal, while their Masala Bond issuances are likely to be $6 billion. In the next fiscal the bond issuances are likely to be $12 billion, but the quantum of ECBs will remain stagnant at $30 billion, the report said.

Masala Bonds, christened by the World Bank, International Finance Corporation, since its first rupee bond issuance last November, are rupee-denominated debt instruments issued in offshore capital markets to overseas investors but settled in dollars and, therefore, the currency risk resides with investors.

As per the report, Masala Bonds offer domestic corporates more options to blend their debt portfolio to optimise the liability and minimise the cost.

Further, it can be a launch pad to sell the strength of rupee to the overseas investors.

Among the first off the block to plan a Masala Bond issue is the Indian Railway Finance Corp which has a board approval to raise $1 billion through this route this fiscal.

Earlier in 2014, IFC had issued a 10-year, Rs 1,000 crore rupee-bond to increase foreign investment by mobilising global capital markets to support infrastructure development.

Following the success of the IFC issue, the Asian Development Bank also issued similar bonds. The IFC bonds are offering a yield of 6.3%.

Masala Bonds could also increase demand for similar products later as liquidity of these bonds goes up.

This also shows the confidence of international investors in the country's economy and the rupee.

Another plus point is that while the cost of hedging the currency risk involved in forex borrowings takes away part of the advantage of lower borrowing costs, the Masala Bonds will transfer any currency risk to the investor from the issuer, thereby bringing down the cost of overseas borrowing considerably.

The Reserve Bank in its monetary policy announcement on April 7 had said it would allow domestic corporates to issue offshore rupee bonds. But final guidelines are awaited.